February 23, 2011

Having talked about the success to date of the Renewable Portfolio Standard (RPS) (the requirement that utility companies purchase a portion of their power from renewable energy sources) on February 12, I was gratified to see that the California Public Utilities Commission (CPUC) Division of Ratepayer Advocates (DRA) took notice and released a report in response on February 18. Given the depth of the report, I admit that they must have been working on it before I spoke. However, rumor has it that the release date was accelerated after I addressed the subject.

Seriously, the DRA makes important points about the effect of the RPS on California’s move to renewable sources of power. In order to meet the 20% threshold by 2010 (with a flexible extension to 2013), California’s utilities put a premium on certainty of project completion over price. Thus, when evaluating two renewable power projects, the utility has an incentive to select the project with the higher cost of power, but the greater likelihood of coming on line. The report, citing information supplied by utilities, lists three factors that are most likely to account for a project’s failure to come on line: inability to get financing, inability to get permits, and lack of transmission capacity.

Compare the obstacles facing renewable power projects with a new natural gas turbine power plant. The natural gas power generator is a type of generator with a long history of successful operation (easier to finance), will probably be located near existing similar generators (lower permit costs) and will be at the nexus of existing transmission lines (lower transmission risk). These differences give the natural gas plant a significant advantage because, putting aside differences in generation costs, the transaction costs and risks are much lower than with most renewable power projects. However, this creates a negative feedback loop – we should not build renewable power projects until the cost comes down and the cost cannot come down until we build renewable power projects. Thus, California and other states must break the feedback loop by continuing the drive to renewable power sources until renewable power achieves parity with fossil fuel.